551 A.2d 628 | Pa. Commw. Ct. | 1988
Opinion by
Manor Health Care Corporation (MHC) appeals to this Court from the final order of the Director of the Office of Hearings and Appeals, Department of Public Welfare (DPW), disallowing, upon the recommendation of the Hearing Attorney, certain depreciation costs which were submitted for the purpose of calculating medical assistance reimbursements for the fiscal years 1982 and 1983.
This case arises under Title XIX of the Federal Social Security Act, 42 U.S.C. §§1396-1396q (1984), which establishes the Medical Assistance Program, commonly known as “Medicaid.” This program is jointly funded and administered by the federal government and the states which elect to participate.
In the case presently before us, MHC negotiated an agreement with the CENCO corporation whereby CENCO granted MHC a one hundred and twenty-day option to purchase all the shares of its subsidiary, the Leader Healthcare Organization (LHO), for thirty million dollars. CENCO, apparently among its other holdings, was the parent and sole stockholder of LHO. LHO was the owner and sole shareholder of Leader Nursing Centers Incorporated (LNCI), a Pennsylvania corporation which owned and operated seventeen nursing homes whose Medicaid payment rates are the subject of
On October 19, 1981, MHC exercised its option and purchased all of the stock of LHO. On May 21, 1982, seven months after completing that purchase, MHC merged LNCI into LHO, and then merged LHO into itself, MHC. The corporations were, therefore, “telescoped,” and the only surviving corporation was MHC, which then owned seventeen nursing homes. During this period of time, namely, from October 1981 until May 1982, MHC completed a purchase of CENCO, the former parent and grandparent respectively of LHO and LNCI.
In accordance with DPW regulations, LHO filed final cost reports from the beginning of its facilities’ fiscal year to the effective date of the merger of LHO into MHC, i.e., January 1, 1982 to May 21, 1982.
On appeal, MHC argues that its purchase of one hundred percent of the stock of LHO, followed by the subsequent^ merger of LNCI into LHO, and then LHO into MHC, was a single transaction by which MHC in
As a preliminary matter, DPW concluded that the challenged rates effective May 22, 1982 and July 1, 1982, were properly set because MHC did not claim a step-up in the final cost report filed by LHO from January 1, 1981 through May 21, 1982, and since no step-up was claimed, the interim rates effective May 21, and Jut ly 1, 1982, must stand. This Court, however, does not find this to be an accurate depiction of the facts set forth in the record. LNCI did file “final cost reports” for the beginning of its facilities’ fiscal year, January 1, 1982 to the date of the merger of LHO and LNCI into MHC, May 21, 1982. This was done in accordance with the Medical Assistance Manual. See 55 Pa. Code §1181.73 (a).
DPW further argues that MHC did not preserve the right to challenge the interim rates for the period beginning July 1, 1983,
What is left for us to determine as the essential and controlling issue is whether a “step-up” of the capital costs of the acquisition should have been granted.
The Medicare/Medicaid regulations require that participating providers be reimbursed for the reasonable costs of services provided. Capital depreciation of assets is generally recognized as a reimbursable expense. See 42 C.F.R. 413.134(a)(b)(f). The amount allowed for the depreciation of an asset is based on the historical cost of the asset, i.e., the cost actually incurred in acquiring the asset. See 42 C.F.R. 413.134 (a)(2). Assets are revalued or the cost basis is “stepped-up” when assets are transferred and the provider that acquired the assets thereafter depreciates them according to the amount it paid. However, a simple purchase of stock of a corporation will not entitle a purchaser to a stepped-up basis. Richey Manor, Inc. v. Schweiker, 684 F.2d 130 (D.C. Cir. 1982). It is, therefore, vital to MHC’s claim that its transaction (i.e., its purchase of all of the stock of LHO and subsequent liquidation of LHO and LNCI) be deemed an asset acquisition, not merely a purchase of stock. Richey Manor.
The leading case on this issue is Pacific Coast Medical Enterprises v. Harris (PCME), 633 F.2d 123 (9th Cir. 1980). In PCME, a stock purchase agreement was entered into in May 1969, providing for the acquisition of one hundred percent of the stock of Community Hospital. Nine months later, Community Hospital, as a corporate entity, was liquidated and its assets were distributed to PCME. In PCME, it was stipulated that the exchange of stock was made between unrelated parties in an arms length bona fide transaction. The Ninth Circuit found that this was common business practice and that it is generally recognized that a one hundred per
' PC ME establishes that where it can be shown that the intent of a transaction was an acquisition of assets—even though it occurs through a series of steps—it may be treated as an acquisition of assets, so long as the parties were unrelated when the transaction began. However, in order for this “single transaction” rule to apply, there must be evidence that “the acquirer had intended from the outset of the transaction eventually to transfer to itself the assets of the acquired company.” Humana, Inc. v. Heckler, 758 F.2d 696, 705 (D.C. Cir. 1985). ‘
DPW, in determining whether MHC had intended to purchase the assets of LNCI from the outset, looked to MHCs agreement to purchase the stock of CENCO. DPW concluded that this agreement did not' express any original intent to merge CENCO s other subsidiaries. We do not believe this reasoning to be supported by the record. Upon examining the record, we believe that the operative transaction that should have been examined by DPW was MHCs purchase of one hundred percent of LHO’s stock from CENCO, and not the purchase of CENCO, an entirely different corporation with other holdings.
' DPW, citing 42 C.F.R. 405.415(l)(2)(ii) in its adjudication, determined that the transaction between MHC and LNCI was between “related parties,” and therefore disallowed the depreciation expense submitted by MHC.
At the time the purchase of LHO was negotiated, MHC and CENCO were two separate and distinct corporations. The purchase price for LHO was established in a bona fide arms length transaction. When MHC purchased LHO, LHO was parent and sole shareholder of LNCI, and MHC’s purchase of LHO was tantamount to its purchase of L'NCI. Seven months later, MHC merged the two corporations into itself.
We view this entire transaction as a single transaction carried out in two steps, and we believe that the arm’s length relationship continued to exist until the transaction was complete. Id. Therefore, we do not believe the parties were “related” as DPW asserts.
In its brief, DPW asserts that the PCME “test” no longer applies, citing Fairwinds Manor v. Department of Public Welfare, 517 Pa. 106, 535 A.2d 42 (1987) and Mountain Rest Nursing Home, Inc. v. Department of Public Welfare, 73 Pa. Commonwealth Ct. 42, 457 A.2d 600 (1983). DPW contends that Fairwinds and Mountain Rest maintain that DPW can preclude step-up under Manual Section IV-D-9-f, found at 8 Pa. B. 2832 (1978), and that under Title XIX no step-up at all is required.
DPW also argues that the recent case law departs from the principles laid out in PCME. Again, we cannot agree. Richey Manor which is cited by DPW, specifical-
Accordingly, for the reasons stated above, this Court will reverse the order of DPW.
Order
Now, December 14, 1988, the order of the Department of Public Welfare in the above-captioned matter is hereby reversed.
Pennsylvania is a participating state. See Section 443.1 of the Public Welfare Code, Act of June 13, 1967, PL. 31, as amended, 62 P.S. §443.1. Section 443.1 was added by Section 5 of the Act of July 31, 1968, P.L. 904.
55 Pa. Code §1181.71(a) states:
The fiscal year for.purposes of Medical Assistance payments for skilled nursing and intermediate care facilities will be either January 1 through December 31 or July 1 through June 30 as designated by the facility.
Interim per diem rate is defined as the “rate established by the Department [DPW] for the purpose of making interim payments to the facility pending a year-end cost settlement. The rate is based on the latest adjusted reported net operating costs of the facility.” See 55 Pa. Code'§1181.2
No explanation was offered by either party as to why the MA-lls used a different year (calendar year January 1 to December 31) rather than the fiscal year of the new provider, MHC.
It is unclear from MHCs and DPWs briefs when the 1983 rates became effective. DPW asserts that it was July 1, 1983 (see DPWs brief at. 12), MHC asserts June 1 (see MHCs brief at 8, 15).
MHC has asked this Court to consider, as a threshold issue, whether DPW had actually considered all of the documents introduced by MHC at the Departmental hearing, as records were missing from the certified record that was originally sent to this Court. MHC previously filed a motion with respect to the omissions in the record, seeking summary judgment, arguing that DPW foiled to consider the entire record below. DPW opposed that motion, arguing that the foct-finders files included the entire record below and that the lack of exhibits in the record was due to clerical error. DPW subsequently supplied- this Court with the missing documents. By order dated January 14, 1988, this Court denied MHCs motion under Pa. R.A.P. 1951(b). This Court has reviewed the record and our decision and find that it is consistent with the law.
Pennsylvania’s guidelines and procedures for cost-related reimbursement are detailed in the Manual for Allowable Cost Reimbursement for Skilled Nursing and Intermediate Care Facilities Manual (Manual). The Manual originally appeared at 5 Pa. B. 2928-34 (1974), and has been codified in its current amended form at 55 Pa. Code §§1181.201-1181.274. The Medicare Provider Reimbursement Manual (HIM-15) and the Code of Federal Regulations appropriate to the reimbursement of nursing facility care serve as a supplement to the Manual. See 55 Pa. Code §1181.201.
55 Pa. Code §1181.73(a) provides:
A facility that enters into a termination agreement or agreement of sale is required to file a cost report with the Department within 30 days after the effective date of the termination or transfer and is required to provide financial records to the Department for auditing.
55 Pa. Code §1181.67(4) provides:
The Department [DPW] establishes interim per diem, rates on the basis of the following methods:
(4) For facilities entering the program and for facilities in the program with changes of ownership, . . . the facility’s projected MA-11 cost report will be used to set the interim rate for Medical Assistance during the initial period of operation pending the filing of the first year-end cost report.
55 Pa. Code §1181.72 provides in part:
[A] facility may file an interim cost report as justification for an interim rate change. However, the interim report may not be filed prior to January 1 (a report received prior to that date will be returned), and shall cover a 6-month, period. (Emphasis added.)
See supra, 5.
See supra, 4.
Even if DPW is correct in finding that the operative transaction was MHCs acquisition of CENCO, substantial evidence in the record shows that MHCs tender offer to purchase CENCO was for the explicit purpose of merging LHO and LNCI into itself. See DPWs Exhibit E at 12.
DPW, in its brief, referred tó the statement of an officer of the Leader Corporation which had been acquired by CENCO. (See DPWs brief at 13-14.) DPW stated that the statements made by Leaders president demonstrate that the transaction was not intended to be an acquisition of assets. We believe this argument to be unpersuasive. The transaction in question was between MHC and CENCO. The intent of an officer of the Leader Corporation is clearly not relevant as he had neither direct contact with MHC, nor any way of' knowing the intentions of MHC in acquiring LHO' or LNCI. ...
That section currently appears as 42 C.F.R. §413.134(k)(2) (ii). ■ '
16 The Manual defines “related parties” as “an individual or organization that is ássociated or affiliated with, or has control of or is controlled by, the provider. ‘Control,’ as used in this definition, means the power to influence or direct the actions or policies of another.” See 55 Pa. Code §1181.202.
See also 42 C.F.R. §413.17(b)(1), which defines “related to the provider” as “the provider tó a significant extent is associated or affiliated with or has control of or is controlled by the organization furnishing the services,' facilities or supplies.”
This section of the Manual provides:
The cost basis for depreciable assets of a facility purchased as an ongoing operation shall be the lesser of the purchase price or the fair market value based on the lesser of at least two bona fide appraisals at the-time of the sale and less any*111 straight line depreciation by the prior owner. The sale must be an arms length transaction consummated in the open market between nonrelated parties, in a normal, buyer-seller relationship.
This section of the Manual is now codified, in its amended form at 55 Pa. Code §1181.259(m)(l).
DPW has also cited Hempstead General Hospital v. Whalen, 474 F. Supp. 398 (E.D. N.Y. 1979), aff'd mem. 622 F.2d 753 (2d Cir. 1980). We believe that case to be distinguishable from the one before us today. In Hempstead, Hempstead General Hospital was challenging the constitutionality of New York State medicaid regulations on their face. Those regulations provide that after a transfer, the cost of the capital assets to the buyer of a health-care facility will be the same as the cost of those assets to the seller. In other words, reimbursement- rates now paid to present owners of a facility in New York, would, after a sale, be the same amount paid to the new owner without any increase for reimbursement of the purchase price. In this case, unlike Hempstead, DPW has acknowledged that its regulations require a revaluation of assets, upon the acquisition of an ongoing facility;, however, it must be done fairly. Thus, we find DPW s ■ argument that Hempstead is relevant to be unpersuasive.